MODULE 2

NOTES PAYABLE
& DEBT
RESTRUCTURING

Daizy Marie P. Nicart, CPA

PROMISSORY NOTE
A promissory note is an unconditional promise
in writing made by one person to another,
signed by the maker, engaging to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer.
A note payable not designated at fair value
through profit or loss shall be measured initially at
fair value minus transaction costs that are directly
attributable to the issue of a note payable.

• Transaction costs are included in the INITIAL

measurement of note payable
• If the note payable is irrevocably designated at
MEASUREMENT
fair value through profit or loss, the transaction OF NOTES
costs are expensed immediately.
PAYABLE
Fair value → equal to the present value of the
future cash payment to settle the note payable
using market rate of interest
 PRESENT VALUE OF
NOTES PAYABLE
NOTES ISSUED FOR CASH
• Present Value is equal to the
Cash Proceeds

INTEREST BEARING NOTE

❖ Present Value is equal to
Face Value

NON INTEREST BEARING NOTE

1. Cash price
2. Present value of all collections
 Illustration 1 : NOTE ISSUED FOR CASH
On November 1, 2020, an entity Journal Entry : December 31, 2020
discounted its own note of Interest Expense 20,000
P1,000,000 at 12% for one year.
Discount on Notes Payable 20,000

(120,000 x 2/12)
Note Payable 1,000,000
Less: Discount (12% x 1,000,000) 120,000
FS Presentation : Dec. 31, 2020
Net Proceeds 880,000
Note Payable 1,000,000

Journal Entry : Nov. 1, 2020 Discount on Note Payable (100,000)

Cash 880,000 Carrying Amount 900,000

Discount on Notes Payable 120,000 *The Discount on Note Payable is a direct deduction
Note Payable from the face amount of the Note Payable
1,000,000
 Illustration 2 : INTEREST BEARING NOTE
Dec. 31, 2020 : Payment of First installment &
On January 1, 2020, an entity Interest
acquired an equipment for
Interest Expense (10% x 1M) 100,000
P1,000,000 payable in 5 equal
installments every December 31 of Note Payable 200,000
each year. Interest is 10% on the
unpaid balance. Cash 300,000

Journal Entry : Jan. 1, 2020 Dec. 31, 2021 : Payment of Second Installment &
Interest
Equipment 1,000,000
Interest Expense (10% x 800,000) 80,000
Note Payable 1,000,000
Note Payable 200,000
Cash 280,000
 Illustration 3 : NON INTEREST BEARING
NOTE
Dec. 31, 2020 : Payment of Annual Installment
On January 1, 2020, an entity
acquired an equipment with a cash Note Payable 100,000
price of P350,000 for P500,000,
Cash 100,000
P100,000 down and the balance
payable in 4 equal annual
installments. Dec. 31, 2021 : Amortization of the discount for 2020

Interest Expense (10% x 800,000) 60,000

Journal Entry : Jan. 1, 2020 Discount on Note Payable 60,000
Equipment 350,000
Discount on Notes Payable
*The amortization is based on Notes Payable
150,000 Outstanding Balance method.
Cash 100,000
Note Payable 400,000
 Illustration 4 : NON INTEREST BEARING
NOTE (No Cash Price)
Journal Entry : Jan. 1, 2020
On January 1, 2020, an entity acquired
an equipment for P1,000,000 payable in Equipment 758,160
5 equal annual installments on every Discount on Notes Payable 241,840
December 31 of each year.
Note Payable 1,000,000
Note that there is no agreed interest and no cash December 31, 2020
price is available for the equipment. In such a
Note Payable 200,000
case, the cost of the equipment is equal to the
present value of the P200,000 annual installments in Cash 200,000
5 years at an appropriate rate of 10%.

The present value of an ordinary annuity of 1 for 5 Interest Expense 75,816

years at 10% is 3.7908. Discount on Note Payable 75,816
Table of Amortization
Therefore, the present value of five P200,000 Date Payment I nterest Principal Present Value
installments is P758,160, computed by multiplying Jan. 1, 2020 758,160
P200,000 by the present value factor of 3.7908. Dec. 31, 2020 200,000 75,816 124,184 633,976
Dec. 31, 2021 200,000 63,398 136,602 497,374
Dec. 31, 2022 200,000 49,737 150,263 347,111
Dec. 31, 2023 200,000 34,711 165,289 181,822
Dec. 31, 2024 200,000 18,178 181,822 -
TOTALS 1,000,000 241,840 758,160
 Illustration 4 : NON INTEREST BEARING
NOTE (No Cash Price)
PRESENTATION OF THE NOTES PAYABLE IN THE STATEMENT OF FINANCIAL
POSITION AS OF DECEMBER 31, 2020

FS Presentation : Dec. 31, 2020

On January 1, 2020, an entity acquired an CURRENT LIABILITY
equipment for P1,000,000 payable in 5 equal
annual installments on every December 31 of Note Payable 200,000
each year. Discount on Note Payable (63,398)
Table of Amortization Carrying Amount – Amortized Cost 136,602
Date Payment I nterest Principal Present Value
Jan. 1, 2020 758,160
Dec. 31, 2020 200,000 75,816 124,184 633,976
NONCURRENT LIABILITY
Dec. 31, 2021 200,000 63,398 136,602 497,374
Dec. 31, 2022 200,000 49,737 150,263 347,111 Note Payable 600,000
Dec. 31, 2023 200,000 34,711 165,289 181,822
Dec. 31, 2024 200,000 18,178 181,822 - Discount on Note Payable (102,606)
TOTALS 1,000,000 241,840 758,160
Carrying Amount – Amortized Cost 497,374
 Illustration 5 : NONINTEREST BEARING
NOTE PAYABLE LUMP SUM
On January 1, 2020, an entity acquired an Journal Entry : January 1, 2020
equipment for P1,000,000. The entity paid
P100,000 down and signed a noninterest Equipment 776,170
bearing note for the balance which is due Discount on Note Payable 223,830
after three years on January 1, 2023.
Cash 100,000
There was no established cash price for
the equipment. The prevailing interest rate Note Payable 900,000
for this type of note is 10%. The present
value of 1 for 3 periods is .7513. December 31, 2020 : Interest Expense Recognition

Down payment 100,000 Interest Expense 67,617

Discount on Note Payable 67,617
Present value of note (P900,000 x .7513) 676,170
Cost of equipment 776,170 I nterest Discount on
Present Value
Date Expense Notes Payable
Jan. 1, 2020 223,830 676,170
Face value of note 900,000 Dec. 31, 2020 67,617 156,213 743,787
Dec. 31, 2021 74,379 81,834 818,166
Present value of note 676,170 Dec. 31, 2022 81,834 - 900,000
Imputed Interest TOTALS 223,830 238,047
223,830
FAIR VALUE OPTION OF
MEASURING NOTE PAYABLE
❑PFRS 9, paragraph 4.2.2 provides that at initial
recognition, a note payable may be irrevocably
designated as at fair value through profit or loss.
❑Gain or loss shall be accounted for as :
✓Change in fair value attributable to the credit risk is
recognized in other comprehensive income
✓Remaining amount of the change in fair value is
recognized in profit or loss.
❑Under the fair value option, any transaction cost is
recognized as outright expense.
❑There is no amortization of discount and premium on
note payable.
 Illustration 6 : FAIR VALUE OPTION OF
MEASURING NOTE PAYABLE
Journal Entry : January 1, 2020
On January 1, 2020, an entity borrowed from a
bank P4,000,000 on as 12% 5-year interest bearing Cash 4,000,000
note. Note Payable 4,000,000
The entity received P4,000,000 which is the fair
value of the note on January 1, 2020. Transaction
Transaction Cost 100,000
cost of P100,000 was paid by the entity.
Cash 100,000
The fair value of the note payable was P3,500,000
on December 31, 2020. December 31, 2020

The entity has elected irrevocably the fair value Interest Expense (12% x 4M) 480,000
option for measuring note payable. Cash 480,000
The change in fair value comprised P50,000
attributable to credit risk and P450,000 attributable
to interest risk. Note Payable 500,000
Gain from Change in Fair Value 450,000
Carrying Amount 4,000,000
Gain from credit risk – OCI 50,000
Fair Value – December 31, 2020 3,500,000
*The Gain from Change in Fair Value is recognized in Profit or Loss
Decrease in FV of Liability – Gain 500,000 *The Gain from Credit Risk is recognized in other comprehensive
income
SAMPLE EXERCISES
Please get your calculator, ballpen and paper
PROBLEM 1

Ontario Company, a natural energy supplier, borrowed P8,000,000 cash on

November 1, 2020 to fund a geological survey. The loan was granted by
United Bank under a short-term credit line. Ontario issued a 9-month, 12%
promissory note with interest payable at maturity. The fiscal period is the
calendar year.

Required:
1. Prepare the journal entry for the issuance of the note payable by Ontario
Company.
2. Prepare the appropriate adjusting entry for the note payable on
December 31, 2020.
3. Prepare the journal entry for the payment of the note payable at
maturity.
PROBLEM 2

North Company acquired a machinery with cash price of P750,000 for

P1,000,000.

The entity paid P200,000 and signed a noninterest bearing promissory note
for the balance which is payable in 4 equal installments every December 31
of each year.

Required:
Prepare journal entries for 2020.
PROBLEM 3

On January 1, 2020, Lizelle Company received P1,000,000 on a non-interest bearing note due in
three years. The market rate of interest on such date is 10%.

The entity irrevocably elected the fair value option in measuring the note payable.

On December 31, 2020, the risk factors indicated that the rate of interest applicable to the
borrowing was 9%. The present value factors at 10% and 9% are:

PV factor 10%, 3 periods .751 PV factor 9%, 3 periods .772

PV factor 10%, 2 periods .826 PV factor 9%, 2 periods .842
PV factor 10%, 1 period .909 PV factor 9%, 1 period .917

1. What is the initial carrying amount of the note payable on January 1, 2020?
2. What is the carrying amount of the note payable on December 31, 2020?
3. What amount of net gain or loss from the change in fair value of the note payable should be
reported for 2020?
EXERCISE NO. 4

On September 1, 2018, YXY Company issued a note payable in the

amount of P1,800,000, bearing interest at 12%, and payable in three
equal annual principal payments of P600,000. The first interest and
principal payment was made on September 1, 2019.

1. On December 31, 2019, what amount should be reported as

accrued interest payable?

2. What is the interest expense that should be recorded by YXZ

Company for the year 2019?
EXERCISE NO. 5

On January 1, 2018, ABC Company lent P1,780,000 cash to Stone

Company. The promissory note made by Stone for P2,000,000 did not
bear explicit interest and was due on December 31, 2019. The
prevailing interest rate for a loan of this type was 6%. The present value
of 1 for two periods at 6% is .89.

1. What amount of interest expense should be recognized for 2018?

2. What is the carrying amount of the Notes Payable on Dec. 31, 2018?
 ASSIGNMENT:
PLEASE REFER TO LMS FOR YOUR
ASSIGNMENT
 DEBT
RESTRUCTURING

Daizy Marie P. Nicart, CPA

DEBT RESTRUCTURING
Debt restructuring is a situation where the
creditor, for economic or legal reasons related
to the debtor’s financial difficulties, grants to
the debtor concession that would not
otherwise be granted in a normal business
relationship.
 TYPES OF DEBT
RESTRUCTURING

ASSET SWAP

EQUITY SWAP

MODIFICATION OF TERMS
 ASSET SWAP

Asset swap is the transfer by the debtor to the

creditor of any asset in full payment of the
obligation

➢ Asset swap is treated as a derecognition of a

financial liability or extinguishment of an
obligation.

➢ The difference between the carrying amount of

the financial liability and the consideration given
shall be recognized in profit or loss.

Dacion en pago is a form of asset swap.

 Illustration 1 : Asset Swap
An entity provided the following balances at
year end: Journal Entry
Note Payable 2,000,000 Note Payable 2,000,000

Accrued Interest Payable 400,000 Accrued Interest Payable 400,000

Land 1,500,000
At year end, the entity transferred to the
Gain on Extinguishment of debt 900,000
creditor land with carrying amount of
P1,500,000 and fair value of P2,200,000.

Notes Payable 2,000,000

Accrued Interest Payable 400,000
Total Liability 2,400,000
Less : Carrying Amount of Land 1,500,000
Gain on extinguishment of debt 900,000
 Illustration 1 : Asset Swap (USA GAAP)
Under USA GAAP, asset swap is recorded as if two transactions have taken place, namely the
sale of the asset and the extinguishment of the liability. Accordingly, two gains or losses are
recognized.
Fair Value of Land 2,200,000
An entity provided the following balances at Carrying Amount of Land 1,500,000
year end:
Gain on Exchange 700,000
Note Payable 2,000,000
Accrued Interest Payable 400,000
Note Payable 2,000,000
At year end, the entity transferred to the
creditor land with carrying amount of Accrued Interest Payable 400,000
P1,500,000 and fair value of P2,200,000.
Total Liability 2,400,000
Journal Entry Fair value of land 2,200,000
Note Payable 2,000,000 Gain on Debt Restructuring 200,000
Accrued Interest Payable 400,000
*The difference between the fair value of the asset and the
Land 1,500,000 carrying amount is Gain or Loss on Exchange.
Gain on Exchange 700,000
*The difference between the carrying amount of the
Gain on Debt Restructuring 200,000 liability and the fair value of the asset is gain or loss from
restructuring.
 Illustration 2 : Dacion en Pago accounting
Dacion en pago arises when a mortgaged property is offered by the debtor in full settlement of
the debt. The transaction shall be accounted for as an “asset swap” form of debt restructuring.

Land costing P500,000 and building costing

P4,000,000 with accumulated depreciation of Total Liability 3,250,000
P800,000, were mortgaged to secure a bank loan
of P3,000,000. Less : Carrying amount of land and
3,700,000
building (500,000 + 3,200,000)
Loss on extinguishment of debt (450,000)
Face amount of the loan 3,000,000
Accrued interest payable 200,000
Journal Entry
Legal Fee and bank service charges 50,000
Mortgage Payable 3,000,000
Accrued Interest Payable 200,000
Subsequently, the land and building were given to Bank service charge 50,000
the bank in full payment of the liability.
Loss on extinguishment of debt 450,000

*If the balance of the obligation including accrued Accumulated depreciation 800,000
interest and other charges is more than the carrying Land 500,000
amount of the property mortgaged, there is a gain on
Building 4,000,000
extinguishment of debt.
 EQUITY SWAP
Is a transaction whereby a debtor and creditor may
renegotiate the terms of a financial liability with the
result that the liability is full or partially extinguished by
the debtor issuing equity instruments to the creditor.

Simply, equity swap is the issuance of share capital by

the debtor to the creditor in full or partial payment of
an obligation.
 INITIAL MEASUREMENT OF
EQUITY INSTRUMENTS ISSUED
TO EXTINGUISH A FINANCIAL
LIABILITY
1 Fair value of equity instruments
issued

Fair value of liability

2
extinguished

Carrying amount of liability

3 extinguished
 Illustration : EQUITY SWAP
PRIORITY 1 : FAIR VALUE OF SHARES ISSUED
An entity showed the following data at year Fair Value of Shares Issued 4,500,000
end: Par value of shares issued 2,000,000
Share Premium 2,500,000
Bonds Payable 5,000,000
Accrued interest payable 500,000 Bonds Payable 5,000,000
Accrued Interest Payable 500,000

The entity issued share capital with a total par Carrying Amount of Bonds Payable 5,500,000
value of P2,000,000 and fair value of P4,500,000 Fair Value of Shares Issued 4,500,000
in full settlement of the bonds payable and Gain on Extinguishment of Debt 1,000,000
accrued interest.
Journal Entry
Bonds Payable 5,000,000
On the other hand, the fair value of the bonds
Accrued Interest Payable 500,000
payable is P4,700,000.
Share Capital 2,000,000
Share Premium 2,500,000
Gain on Extinguishment of Debt 1,000,000
 Illustration : EQUITY SWAP
PRIORITY 2 : FAIR VALUE OF BONDS PAYABLE ISSUED
An entity showed the following data at year Fair Value of Bonds Payable 4,700,000
end: Par value of shares issued 2,000,000
Share Premium 2,700,000
Bonds Payable 5,000,000
Accrued interest payable 500,000 Bonds Payable 5,000,000
Accrued Interest Payable 500,000

The entity issued share capital with a total par Carrying Amount of Bonds Payable 5,500,000
value of P2,000,000 and fair value of P4,500,000 Fair Value of Bonds Payable 4,700,000
in full settlement of the bonds payable and Gain on Extinguishment of Debt 800,000
accrued interest.
Journal Entry
Bonds Payable 5,000,000
On the other hand, the fair value of the bonds
Accrued Interest Payable 500,000
payable is P4,700,000.
Share Capital 2,000,000
Share Premium 2,700,000
Gain on Extinguishment of Debt 800,000
Illustration : EQUITY SWAP
PRIORITY 3 : CARRYING AMOUNT OF BONDS PAYABLE ISSUED
An entity showed the following data at year Carrying Amount of Bonds Payable 5,500,000
end: Par value of shares issued 2,000,000
Share Premium 3,500,000
Bonds Payable 5,000,000
Accrued interest payable 500,000
Journal Entry
Bonds Payable 5,000,000
The entity issued share capital with a total par
value of P2,000,000 and fair value of P4,500,000 Accrued Interest Payable 500,000
in full settlement of the bonds payable and Share Capital 2,000,000
accrued interest.
Share Premium 3,500,000

On the other hand, the fair value of the bonds

payable is P4,700,000.
MODIFICATION OF TERMS
Modification may involve either the interest, maturity
value, or both.

Interest concession may involve a reduction of interest

rate, forgiveness of unpaid interest or a moratorium on
interest.

Maturity value concession may involve an extension of the

maturity date or a reduction of the principal amount.
MODIFICATION OF TERMS
❑ Substantial modification of terms of an existing financial
liability shall be accounted for as an extinguishment of
the old financial liability and the recognition of a new
financial liability.

❑ Substantial modification of terms : if the gain or loss on

extinguishment is at least 10% of the old financial liability.

❑ The difference between the carrying amount of the old

liability and the present value of new or restructured
liability (using the old effective rate ) shall be accounted
for as gain or loss on extinguishment of debt.

❑ Any costs or fees incurred as a result of the substantial

modification of terms shall be recognized as part of gain
or loss on extinguishment.
Illustration1: MODIFICATION OF TERMS
SUBSTANTIAL MODIFICATION
On January 1, 2020, an entity showed the following: STEP 1 : COMPUTE THE PRESENT VALUE OF NEW NOTE
PAYABLE (using the old rate of 14%)
PV of principal (4,000,000 x .5921) 2,368,400
Note Payable – due Jan. 1, 2020 – 14% 5,000,000
PV of interest payments (400,000 x 2.9137) 1,165,480
Accrued Interest Payable 1,000,000
Present Value of New Note Payable 3,533,880

The entity is granted by the creditor the following STEP 2 : COMPUTE FOR THE DISCOUNT ON NOTE PAYABLE
concessions on January 1, 2020: Present Value of New Note Payable 3,533,880
a. The accrued interest of P1,000,000 is forgiven. Face Value of New Note Payable 4,000,000
b. The principal obligation is reduced to P4,000,000. Discount on Note Payable 466,120
c. The new interest rate is 10% payable every
December 31. STEP 3 : COMPUTE FOR THE GAIN / LOSS ON
EXTINGUISHMENT OF DEBT
d. The new date of maturity is December 31, 2023.
Carrying Amount of Old Liability (Face
6,000,000
Value of 5M + Accrued Interest of 1M)
The present value of 1 at 14% for 4 periods is 0.5921 Present Value of New Note Payable 3,533,880
and the present value of ordinary annuity of 1 at 14%
for 4 periods is 2.9137. Gain on Extinguishment of Debt 2,466,120
 Illustration1: MODIFICATION OF TERMS
SUBSTANTIAL MODIFICATION
Journal Entry to record the extinguishment of the old note STEP 1 : COMPUTE THE PRESENT VALUE OF NEW NOTE
payable: PAYABLE (using the old rate of 14%)
Note Payable – old 5,000,000 PV of principal (4,000,000 x .5921) 2,368,400
Accrued Interest Payable 1,000,000 PV of interest payments (400,000 x 2.9137) 1,165,480
Discount on Note Payable 466,120 Present Value of New Note Payable 3,533,880
Note Payable – new 4,000,000 STEP 2 : COMPUTE FOR THE DISCOUNT ON NOTE PAYABLE
Gain on extinguishment of debt 2,466,120
Present Value of New Note Payable 3,533,880
Face Value of New Note Payable 4,000,000
Journal Entry to record the interest payment on the new note
payable for 2020 Discount on Note Payable 466,120

Interest Expense (10% x 4,000,000) 400,000 STEP 3 : COMPUTE FOR THE GAIN / LOSS ON
Cash 400,000 EXTINGUISHMENT OF DEBT
To amortize the discount on note payable for 2020: Carrying Amount of Old Liability (Face
6,000,000
Value of 5M + Accrued Interest of 1M)
Interest expense 94,743
Present Value of New Note Payable 3,533,880
Discount on Note Payable 94,743
Gain on Extinguishment of Debt 2,466,120
 Illustration1: MODIFICATION OF TERMS
SUBSTANTIAL MODIFICATION
Journal Entry to record the extinguishment of the old note Journal Entry for 2020 on the books of the creditor:
payable:
Note Receivable – new 4,000,000
Note Payable – old 5,000,000
Los on debt restructure 2,466,120
Accrued Interest Payable 1,000,000
Note Receivable – old 5,000,000
Discount on Note Payable 466,120
Accrued Interest Receivable 1,000,000
Note Payable – new 4,000,000
Unearned Interest Income 466,120
Gain on extinguishment of debt 2,466,120
To amortize the discount on note payable for 2020: Journal Entry for 2020 on the books of the creditor:

Interest expense 94,743 Cash 400.000

Discount on Note Payable 94,743 Interest Income 400,000

Table of Amortization
Discount
Unearned Interest Income 94,743
Date I nterest Paid I nterest Expense Amortization Present Value
Jan. 1, 2020 3,533,880 Interest Income 94,743
Dec. 31, 2020 400,000 494,743 - 94,743 3,628,623
Dec. 31, 2021 400,000 508,007 - 108,007 3,736,630
Dec. 31, 2022 400,000 523,128 - 123,128 3,859,759
Dec. 31, 2023 400,000 540,241 140,241 4,000,000
TOTALS 1,600,000 2,066,120 - 185,637
Illustration2: MODIFICATION OF TERMS
NO SUBSTANTIAL MODIFICATION
On January 1, 2020, an entity showed the following: STEP 1 : COMPUTE THE PRESENT VALUE OF NEW NOTE
PAYABLE (using the old rate of 10%)
PV of principal (5,000,000 x .7513) 3.756.500
Note Payable – due Jan. 1, 2020 – 10% 5,000,000
PV of interest payments (5M x 14% x 2.4869) 1,740,830
Accrued Interest Payable 1,000,000 Present Value of New Note Payable 5,497,330

STEP 2 : COMPUTE FOR THE PREMIUM ON NOTE PAYABLE

a. The accrued interest of P1,000,000 is forgiven.
Present Value of New Note Payable 5,497,330
b. The new interest rate is 14% payable every
Carrying Amount of Old Liability 6,000,000
December 31.
Premium on the New Note Payable 502,670
c. The new date of maturity is December 31, 2022.
STEP 3 : COMPUTE FOR THE GAIN / LOSS ON
EXTINGUISHMENT OF DEBT
The present value of 1 at 10% for 3 periods is 0.7513
and the present value of ordinary annuity of 1 at 10% Carrying Amount of Old Liability (Face
6,000,000
for 3 periods is 2.4869. Value of 5M + Accrued Interest of 1M)
Present Value of New Note Payable 5,497,330
Gain on Extinguishment of Debt 502,670
 Illustration2: MODIFICATION OF TERMS
NO SUBSTANTIAL MODIFICATION
Journal Entry to record the modified liability on January 1, 2020: STEP 1 : COMPUTE THE PRESENT VALUE OF NEW NOTE
Accrued Interest Payable 1,000,000 PAYABLE (using the old rate of 10%)
Premium on Note Payable 497,330 PV of principal (5,000,000 x .7513) 3.756.500
Gain on modification of terms 502,670 PV of interest payments (5M x 14% x 2.4869) 1,740,830
Journal Entry to record the annual interest payment for 2020: Present Value of New Note Payable 5,497,330
Interest Expense (5,000,000 x 14%) 700,000 STEP 2 : COMPUTE FOR THE PREMIUM ON NOTE PAYABLE
Cash 700,000 Present Value of New Note Payable 5,497,330
Journal Entry to Amortize the Premium on Note Payable :
Carrying Amount of Old Liability 6,000,000
Premium on Note Payable 150,267
Premium on the New Note Payable 502,670
Interest Expense 150,267
STEP 3 : COMPUTE FOR THE GAIN / LOSS ON
Table of Amortization
EXTINGUISHMENT OF DEBT
Discount Carrying
Date Interest Paid Interest Expense Amortization Amount Carrying Amount of Old Liability (Face
6,000,000
Jan. 1, 2020 5,497,330 Value of 5M + Accrued Interest of 1M)
Dec. 31, 2020 700,000 549,733 150,267 5,347,063
Present Value of New Note Payable 5,497,330
Dec. 31, 2021 700,000 534,706 165,294 5,181,769
Dec. 31, 2022 700,000 518,231 181,769 5,000,000 Gain on Extinguishment of Debt 502,670
TOTALS 2,100,000 1,602,670 497,330
SAMPLE EXERCISES
Please get your calculator, ballpen and paper
EXERCISE NO. 1

Rainbow Company showed the following balances on December 31, 2020:

Note payable – due December 31, 2020 1,000,000

Accrued interest payable 200,000

The entity is in financial distress and negotiates with the creditor for the settlement of the
note payable.

Consequently, the entity transferred a patent to the creditor in full satisfaction of the note
payable.

The patent has a carrying amount of P600,000 and a fair value of P1,100,000.

Required: Prepare journal entry to record the asset swap on the books of Rainbow
Company under IFRS.
EXERCISE NO. 3
On January 1, 2020, Sunrise Company is experiencing extreme financial pressure and is in
default in meeting interest payment on a long term note of P6,000,000 due on December 31,
2021.

The interest rate is 12% payable every December 31. The accrued interest payable on January
1, 2020 is P720,000. In an agreement with the creditor, the entity obtained the following
changes in terms of the note:

a. The accrued interest on January 1, 2020 is forgiven.

B. The principal is reduced by P500,000.
c. The new interest rate is 8% payable every December 31
d. The new date of maturity is December 31, 2023.

The present value of 1 at 12% for four periods is 0.6355 and the present value of an ordinary
annuity of 1 at 12% for four periods is 3.0373.

Required: Prepare all indicated entries for 2020.

EXERCISE NO. 4

Due to adverse economic circumstances and poor management, Bontoc Company has
negotiated a restructuring of P8,500,000 note payable to Second Bank.

The bank has agreed to reduce the face amount of the note from P8,500,000 to P8,000,000,
reduce the interest rate from 14% to 10%, and extend the due date one year from date of
restructuring.

The restructuring was done at the beginning of the current year. There is no unpaid interest on
the restructured note at this time.

The present value of 1 at 14% for one period is 0.8772 and the present value of an ordinary of 1
for two periods at 14% is 1.6467)

Required: Prepare journal entries for the current year.

 ASSIGNMENT:
PLEASE REFER TO LMS FOR YOUR
ASSIGNMENT
THANK YOU!